The Chinese government is now facing a dilemma between balancing price growth and easing monetary policy to support the slowing economy as latest government data shows August inflation increased.

The National Bureau of Statistics (NBS) reported on Sunday that China's consumer price index (CPI) for August was much higher compared to July. Food prices in August increased 3.4 per cent compared to the same period in the previous year, which is higher than the 2.4 per cent posted in July.

For the period covering January to August this year, the CPI increased 2.9 per cent compared to the first eight months of last year, which is within the 4 per cent cap that the government has targeted for 2012, according to the NBS report.

Based on a month-on-month comparison, the CPI gained 0.6 per cent in August from the previous month while the producer price index (PPI) fell 0.5 per cent.

The PPI, which gauges wholesale level inflation, tumbled 3.5 per cent in August compared to the same period last year, falling at a much faster rate than July which declined by 2.9 per cent. The data suggests a pessimistic outlook for the Chinese economy.

The rise in CPI growth was boosted by price hikes in food as global grain prices soared in recent months and the heavy rains in China lowered production of vegetables.

Analysts believe that the latest movement in prices will make it hard for Chinese authorities to control inflation at the same time make money accessible to the system in order to stimulate economic activity.

The People's Bank of China has already cut interest rates twice since June as a measure to reverse the decline in economic growth which slowed to 7.6 per cent in the second quarter.

China's industrial output growth slows in August

The National Bureau of Statistics announced that the industrial value-added output in China grew 8.9 per cent year-on-year for the month of August, which is slower compared to July's 9.2 per cent expansion.

The figure is also lower than what most economists have projected which is a 9.1 per cent industrial output growth in August from a year ago.

The total output from January to August this year grew 10.1 per cent compared to the first eight months in 2011, according to the NBS report.

The latest data increases the likelihood that the Chinese government will make further action to "fine tune" policies to help support an economy currently at its softest growth pace in three years. The market is expecting some form of government stimulus or easing of rates in the coming months.

China's primary measure of consumer spending -- retail sales -- was up 13.2 per cent in August year-on-year, according to the statistics bureau. The figure is slightly higher than the 13.1 per cent rise posted in July.

The NBS also reported that urban fixed asset investments in August, which gauges public spending on infrastructure, grew 20.2 per cent during the January to August period of this year compared to the first eight months of the previous year.

China began measuring fixed asset investment in 2011 that includes government investments in both urban and rural areas, although the data does not include rural household investments.

Analysts are predicting an 8 per cent economic growth for China this year -- the slowest rate in 13 years -- as the U.S. and Europe, its two main exports markets continue to experience sluggish economic growth.